Burned But Not Destroyed: How Crises Foster Innovation

Ardet nec consumitur… Burned but Not Destroyed

Oh, my Jesuit mentors would be so pleased with my use of a language that died about 1,500 years ago. I believe this was originally a Roman commander’s dispatch after an attack by Hannibal.

My hope here is to show that a little fire (or pandemic) is not always fatal.

Recently, the Atlantic posted a story about the resilience of human societies in the face of disaster. The author made a strong historical argument that disasters have, in fact, stoked the development of modern cities.

The key finding is this: A major crisis has a way of exposing what is broken and giving a new generation of leaders a chance to build something better.

I think that the same case can be made for industrial distribution and many of its subsegments. I’m tired of the defeatist attitude that COVID will cause irreversible damage to on-shore manufacturing and service industries. You name it, traditional channels are under attack from that most evil of opponents – change.

First, history is filled with stories of seeming defeat, followed by life-changing innovation, as chronicled by the Atlantic.

On Dec. 16, 1835, New York’s rivers turned to ice, and Lower Manhattan went up in flames. Smoke had first appeared in a five-story warehouse near the southern tip of the island. Icy gales blew embers into nearby buildings.

Firefighters were helpless. The rivers were frozen solid; temperatures plunged to -17 degrees. The fire was contained only after the mayor ordered structures surrounding it dynamited, starving the flames of fuel.

Croton Aqueduct opened in 1842. It gave firefighters an ample supply of free-flowing water, even in winter. More importantly, it brought clean drinking water. Remember, once Rome’s ancient aqueducts were no longer functional—damaged first by invaders and then ravaged by time—the city’s population dwindled to a few thousand, reviving only when engineers restored the flow of water.

The worst blizzard in U.S. history was a storm in 1888 that dumped more than 50 inches of snow on the Northeast. Snowdrifts were blown to 50 feet high. Hundreds died of exposure and starvation.

It was not just a natural disaster; it was also a psychological blow. The great machine of New York had seized up and gone silent. NYC had been a transport and communications tangle. Elevated trains rumbled through neighborhoods; electrical wires drooped from thousands of poles.

20 years after the storm, the trains and wires had mostly vanished—at least aboveground. To protect its most important infrastructure from the weather, New York realized, it had to put them underground. New York did not react to the blizzard of 1888 by stockpiling snow shovels. It created an entire infrastructure of subterranean power and transit.

On Oct. 8, 1871, a fire broke out in a barn owned by Mrs. O’Leary in southwest of Chicago’s city center. Gusty winds drove the fire toward Lake Michigan. In the go-go era of 19th-century expansion, two-thirds of Chicago’s structures were built of timber. In three days, the fire devoured 20,000 buildings and killed 300 people. A third of the city was left without shelter. The entire business district—three square miles—was a wasteland.

On Oct. 11, as the city still smoldered, the Chicago Tribune published an editorial with an all-caps headline: CHEER UP. The newspaper went on: “In the midst of a calamity without parallel in the world’s history, looking upon the ashes of thirty years’ accumulations, the people of this once beautiful city have resolved that ‘Chicago shall rise again’.”

Post-fire reconstruction brought together a cluster of young architects who ultimately competed with one another to build higher and higher. Ecologically and economically, the skyscraper forged in the architectural milieu of post-fire Chicago is one of the most triumphant inventions in history.

Interesting Stories, But What About Distribution?

Looking at the 60 years of modern industrial distribution (after WWII shortages and the vicious shakeouts of the post war ‘50s), we see a similar pattern of threat followed by innovation. Major segments, like the $380 billion vehicle parts and service aftermarket, have different milestones, but they are of similar importance:

• 1970s… Hyper-inflation and fuel shortages, Clean Air Act, formation of OSHA, Cuyahoga river catches fire, microfiche catalogs introduced

• 1980s… Rebuilt or repaired components vs. imported ‘new everything,’ new air and water EPA Regulations, disruptive deregulation (i.e. the Motor Carrier Regulatory Reform and Modernization Act), Super Fund laws, MSDS mandates

• 1990s… HR1790 Design Innovation and Technology Act (the first real intellectual property battle: “non-genuine” parts and right to repair”), OSHA explodes

• 2000s… Terrorism arrives in the U.S., 20-year war begins, consolidation of distributors, OEMs, authorized OE dealers and suppliers, computer-driven supply chains

• 2010s… Internet B-to-B, morphing of traditional channels, appearance of new (out-of-channel) competitors, mysterious tariff and trade agreements

• 2020 …COVID-19, economic depression, oil price collapse, racial unrest, healthcare uncertainty, hotly contested elections, skilled labor shortages, arrival of AI and autonomous equipment

Certainly, not everyone could survive these disruptions. As many as a quarter of distribution and industrial service businesses haven’t.

Remember the Passive? Nobody Does.

The distribution industry, at least in the 50 years in which I’ve been involved, could be considered slow (iceberg-speed) to change. If you are reading this, however, you are not a believer in not-broke-don’t-fix strategies.

No industrial market has been as difficult as today’s. Following are three trends without sharp edges — changes you don’t have to worry about damaging your business in the short term. But they are likely to make today’s industry unrecognizable in five years:

• Credit will be the overwhelming decider of winners vs. losers. Finely calibrated inventory models will be among the most valuable tools in the distributor’s electronic arsenal, as new financial models redefine loan limits.

• Traceability throughout a product’s entire life is now easy to imagine. Look at food distribution. Not simply another inventory or warranty control, blockchain will change the entire timeframe of supply chains. Faster verified transactions through multi-supplier international and domestic manufacturers will re-define ‘Just in Time’ and eliminate ‘Just in Case.’

• SDG (Sustainability Development Goals) are no longer page fillers in the business plan. They will guide industries from linear (make-distribute-use-toss) to much more circular models. Worldwide climate change acceleration fosters more rebuild and service opportunities, while hastening the decline of extraction fuels and the equipment that uses them.

If those trends are of strategic interest, here are some tactical challenges that have arrived or are right around the corner for distributors:

• Internet B-to-B is facilitating distributor disintermediation and fueling supplier-to-end-use customer (OE-to-C) channels. Amazon and Walmart are not even the key influences. The drivers will be the abundance of independent marketplaces, defined by customer base, geography or product technology.

• A retailing revolution has been caused in large part by decreasing lead times. Inventory location, including in-city, last-mile delivery hubs, are springing up now at an unbelievable rate. The old concept of multi-supplier service warehouses looks ready to reemerge, also encouraging the OE-to-C channel shift.

• Substantial financing is already flowing from major investment banks (Morgan Stanley, et.al.) to REITs dedicated to building this type of warehousing facility. Simon Properties is considering repurposing some of the millions of square feet it owns in failed malls to become express delivery depots.

• On an operational basis, we are facing an alphabet soup of acronyms for AI supported equipment. Extra credit if you can understand this real flowchart of technologies: ERP>WMS>TMS>AVG>AMR>CRM>ASRS.

A last thought…

It’s easier to create tomorrow’s structures while today’s are still standing and functioning. We just don’t have time to fix or debate the cracks and faults, nor to wait until all the uncertainties are satisfied.

Steve Jobs described a great way to look at this watershed transformation: “The heaviness of having been successful will be replaced by the lightness of being a beginner again, less sure about everything.”

It can free this business to enter one of the most creative periods in its history.

Next Time:

I feel that the management challenge to watch, that will determine design of everything will certainly involve Management of Confidence and Resilience.

More on this next time.